2/26/14 – Taxes Move Back to Center Stage

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 26, 2014 9:45:54 AM

and tagged Commentary, Politics and the Economy

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What is most interesting in the news is usually the dog that’s not barking. Economics and finance are pretty much absent from the headlines today. Instead, front-page articles in the major newspapers cover childhood obesity, NSA phone surveillance, the Ukraine, and seed-company data harvesting.

This is a shame, but pretty typical. Usually, the best place to look for what will be important in the future is deeper in the paper. Tomorrow’s front-page stories come from further back, and today they’re focused on taxes.

Two stories are worth a look, the first being Congressman David Camp’s tax reform proposal. Camp, the Republican chair of the House Ways and Means Committee, has rolled out a proposal calling for just two individual tax brackets (10 percent and 25 percent) and a reduction in the top corporate tax rate, from 35 percent to 25 percent. This would be paid for by massive elimination of tax breaks and special provisions currently written into the code. Although Camp is a Republican, the proposal reflects substantial input from Democrats.

Unsurprisingly—and unfortunately—both sides have denounced the proposal as dead on arrival. Mitch McConnell says the plan has no chance, and Harry Reid agrees—and both are blaming the other side.

In light of the second piece of news I want to discuss, their dismissal of the proposal may be premature. A study by a group called Citizens for Tax Justice claims that 26 out of 288 Fortune 500 companies that made money paid no corporate income tax from 2008 through 2012, and that 111 of them paid no tax in at least one of those years.

The companies, of course, dispute this, but their arguments are carefully worded, to the extent that I have to wonder why they don’t just disclose how much they paid in federal corporate income taxes. That would seem to be the easiest way to dispute the finding, and that information would, I imagine, be available to management. Quite possibly, both sides are right, depending on precisely how you define “pay,” “taxes,” and “years” . . . which highlights the problem we have.

The recent focus on companies holding billions of dollars in profits overseas, rather than bringing them back and paying taxes, is another slant on the issue. Another is the cost and complication for everyone, families and corporations alike, associated with complying with the tax code—along with the sneaking suspicion that someone else is getting a better deal.

The weird part of this is that tax reform is actually that rarest of political creatures, a potential win-win for both sides. Democrats can raise revenue, even while actual tax rates go down as a result of eliminating special-interest loopholes. Republicans can reduce rates and simplify a tax code they denounce. Both sides can go to their constituencies and pound their chests about how they beat the other guys up.

That’s why I’m more hopeful for this tax reform proposal than many others are. It’s the right thing to do, it includes input from both sides, and it can be a win for everyone. Maybe not this year, with the pending election, but this is a real chance to move forward.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

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